After a year in which stories about cities facing bankruptcy from Detroit to San Bernadino were widely reported, it’s no secret that the fiscal health of many local governments is still on shaky ground. According to Janney Montgomery Scott analyst Tom Kozlik, the financial outlook for U.S. local governments in 2014 is “cautious,” with declining revenues still running behind projected expenditures. While Janney notes that the majority of local governments are on solid footing, he estimates that “10-20% of local government issuers have not adjusted to the new economic reality and are susceptible to rating downgrades in the near term.” With many municipalities still unprepared for the new financial climate, downgrades may outnumber upgrades in 2014.
Kozlik gives a more positive nod to U.S. state governments. Following Moody’s upgraded rating of state governments last August, Kozlik described the fiscal climate as “stable,” continuing a trend toward stronger fiscal health at the state level, with a few exceptions. Building on overall falling unemployment rates and declining mortgage delinquencies, state governments are poised to improve on modest gains in state tax revenues in 2013. Of course, much is contingent on assumptions of steady economic growth in 2014, but state governments are looking ahead to greater stability and flexibility.