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August 30, 2004

Bond rating agency warns it may downgrade New York State

Standard & Poor's Ratings Services warned that continuing "structural imbalances" in New York State's budget, including a projected $6.1 billion gap in 2005, may lead to a downgrading of the state's credit rating.

"The New York State Legislature recently passed a budget with all funds totaling $101.6 billion, which increases out-year gaps," the bond rating agency wrote. While Governor Pataki vetoed $235 million in operations spending and $1.6 billion in bonding, "it is unclear if there will be overrides."

S&P currently gives New York State a rating of AA, the same as most states.

However, according to the rating agency, "The state's outlook is negative and, as additional information is developed on the structural imbalances and plans to reduce gaps, rating actions may occur." An S&P official said any such action is likely to be a downgrade.

This year's state budget includes nearly $4 billion in debt service. A lower credit rating could force the state to pay higher interest rates on future borrowings.

The comments came in S&P's latest Public Finance Report Card on all the states, published August 26. Its bond ratings for California, Tennessee and Arizona have improved in recent months, while those for New Jersey, Maine and Indiana were downgraded.

"Revenue recovery is underway for nearly all states and budget pressures are easing, but remain significant," the agency reported. Most states show "continued reliance on one-time resources to achieve balance, but at reduced levels than prior years, some progress in restoring budget reserves, and continued spending pressures in many program areas."

Governor Pataki warned, in vetoing parts of the Legislature's budget earlier this month, that the state will still face a projected budget gap of $6.1 billion in the fiscal year starting next April 1.