Despite upgrading Nevada’s outlook from negative to stable, the credit rating agency Moody’s downgraded Nevada’s credit rating to Aa2 from Aa1.
The rationale behind the adjustment involves Nevada’s Legislature. Moody’s cited the two-thirds supermajority required to raise taxes as a negative in Nevada.
The Moody’s report released today notes that the potential need to renew the temporary tax increases passed during 2009 could create a challenge for the Legislature.
The governor has said he does not want to extend those tax increases.
“Also, a two-thirds majority of each house of the Legislature is required to renew the taxes into the 2012-2013 biennium and beyond,” writes Moody’s analyst Julius Vizner. “The supermajority requirement to raise taxes presents a hurdle to achieving balance on an ongoing basis going forward.”
The report also notes that Nevada’s economy is largely dependent on discretionary spending in the gaming and tourism industries.
According to the report, Nevada’s revenue base lacks diversity. The state depends too much on revenues from sales tax and gaming revenues. An economic recovery in Nevada could stall if either of those revenue sources falter.
On the positive side, Moody’s analysts note that Gov. Brian Sandoval has the will to make budget cuts.
The report also noted that Nevada has a relatively low debt burden at $2.4 billion and, as the Nevada News Bureau has reported before, the outlook for funding Nevada’s pension system is bright.
Nevada’s declining home prices, however, stymie economic growth.
The collapse of the housing bubble has ratcheted property values down, which presents challenges to lawmakers crafting the state’s budget.
Today, financial officers at Nevada’s school districts testified before a legislative committee about declining property tax collections.
Nonetheless, Moody’s cited upticks in gaming revenues as a sign of a nascent economic recovery.
“The stable outlook reflects our expectation that the economy will recover slowly in the state and that the state’s finances will be weak in the next biennium,” Vizner wrote.
According to Moody’s, Nevada’s credit rating could bounce back if it diversifies its economy and tax base while growing its economy as a whole.
Likewise, Moody’s indicated that it would further downgrade Nevada’s rating should the Legislature delay implementing reforms to the state’s tax base.
Nevada’s credit rating might further erode if it does not cut spending if revenue collections fall short of projections.
Nevada will receive a formal revenue forecast on May 1, which will be crucial for legislators as they piece together the state budget for the next two years.