DALLAS — After overcoming a $1 billion budget deficit in its 2015 legislative session, Arizona was rewarded with a Moody's Investors Service upgrade to Aa2 from Aa3 on May 4.
Moody's cited "budget actions expected to eliminate a structural imbalance resulting from the expiration of a temporary sales tax enacted during the recession, and below average debt and pension liabilities."
Moody's positive outlook has returned to stable after the upgrade. On a cautionary note, analyst Kenneth Kurtz also cited "extremely narrow reserves and weaknesses in financial management and governance." The stable outlook reflects the agency's expectation of continued economic growth and the stabilization of budget reserves.
With general obligation debt virtually forbidden by the state constitution, Arizona has no GO rating but instead carries an issuer credit rating. Kurtz said that even at Aa2, Arizona remains below the Moody's median for U.S. states.
Arizona carries $2.5 billion of lease-revenue certificates for a lower-than-average per capita debt load of $902. Standard & Poor's provides an issuer credit rating of AA-minus with a positive outlook.
The Moody's upgrade is a significant early victory for Gov. Doug Ducey, who took office in January with a vow to restore structural balance to the budget without increasing taxes. Arizona's deficit arose after the expiration of a three-year, 1-cent state sales tax increase in 2013.
As part of the recently adopted 2016 budget, the state passed several one-time and recurring actions designed to stabilize reserves in 2016 and restore the budget to structural balance by or before 2018. The Legislative Budget Committee projects reserves of about $375 million at the end of 2018, up slightly from the end of 2014.
In fiscal year 2010, the state had to rely on borrowing to cover huge cash deficits.
"Since that time overall liquidity has improved significantly, initially as a result of deficit financings completed in late fiscal 2010 but, since that time, due to improved cash balances in the General Fund and other operating funds," Kurtz said.
Arizona has not issued cash flow notes or engaged in any external liquidity borrowing since fiscal year 2010. Arizona's economy appears to be recovering steadily from the housing and financial markets collapse that hit the state so hard in 2009, Kurtz said.
