NEW YORK (Reuters) - The credit quality of U.S. states is declining because of political uncertainty out of Washington and expenses that have outpaced inflation, according to a report on Tuesday from global investment management firm Conning Inc.
The firm's bi-annual examination of states also noted stalled state revenue growth, a continuing problem. In its last report in October, Conning had lowered its outlook on the state sector because revenues had fallen slightly.
State tax revenues grew only 0.4 percent in 2016 due to low oil prices, weak equity markets and lower corporate profits, the report said.
A new pressure has also emerged, with uncertain federal policies that could impact the public finance sector coming from President Donald Trump's administration, including proposals to replace Medicaid funding with block grants, reduce aid to so-called sanctuary cities and cut education programs.
"These actions will require states to either raise taxes, spend more to maintain existing programs, or reduce services," the Conning report said.
Depressed drilling activity and low oil prices have also dampened activity in Alaska, North Dakota and Louisiana, all of which have drawn on reserves to balance their budgets, the report said.
A few other states, particularly Illinois, New Jersey and Connecticut, continue to struggle with high debt and unfunded pension liabilities.
However, some parts of the Pacific Northwest and the Southeast have had above-average growth because of regulations and tax policies favorable to businesses, the report said.
Reporting by Hilary Russ in New York; Editing by Leslie Adler