S&P says U.S. states grapple with economic "double whammy"

By Lisa Lambert

WASHINGTON (Reuters) - The U.S. housing market downturn and a possible recession have delivered states a "double whammy" that has reduced sales and property tax revenue and "thrown many budgets that seemed stable only a few months ago out of whack," Standard & Poor's said on Tuesday.

In two reports, the ratings agency said states are seeking a variety of salves for their worsening economies, from selling assets to issuing bonds, but they do not consider the federal fiscal stimulus package a potential remedy.

"Federal action on a stimulus package was swift. Yet many states have not factored this into their revenue forecasts and do not expect it to be a significant factor," one report on states' 2009 budgets said about the raft of Congressional measures passed last month to give the economy a boost.

The package's bonus depreciation component, which allows a business to claim an immediate federal tax deduction of up to 50 percent of the cost of new equipment, will cut revenues for states that link their tax codes to the national one, the report found.

Instead, many states are considering their own stimulus proposals, such as Ohio which will ask voters to approve $1.7 billion job and economic development bonds, according to Standard & Poor's. States are also hoping to issue bonds to fund pensions and schools improvement, as well as cut spending, the agency found.

Several state governments are weighing selling, leasing or monetizing their assets, with at least three working on schemes involving their lotteries.

At the same time, it said, many states have been able to draw on healthy reserves to cover shortfalls and states that produce energy resources will likely endure the downturn.

S&P said it did not find that the foreclosure crisis has had a direct impact on state and local government credit, because the vast majority of homeowners have paid their mortgages and taxes on time. The increasing number of foreclosed homes has mostly damaged exurban areas in the south-western United States, it said in another report, "The New Realities of State and Local Government Finance."