NEW YORK, Sept 19 (Reuters) - Ongoing macroeconomic risks and budgetary challenges prompted Moody's Investors Service on Wednesday to reiterate its negative outlook on U.S. states for the fifth year in a row since the start of the recession in 2007.
"While the U.S. states remain strong with tax revenues having recovered modestly, states face persistent fiscal challenges due to the slow recovery of the U.S. economy, a weak global economic outlook and risks to states from federal downsizing," said Ted Hampton, the author of the Moody's report.
The ratings agency, which had already issued a negative outlook report in February, said that the sector outlook remained negative midway through the year.
Since the recession started, "states have shown the ability to rein in spending, shift fiscal burdens onto local units and, to a lesser extent, increase tax revenues," said Hampton.
States' credit standing remains relatively strong in comparison to other sectors.
Thirty of the 50 states have general obligation bonds rated by Moody's at Aaa or Aa1.
During 2012, downgrades were limited to Pennsylvania (to Aa2 from Aa1), Connecticut (to Aa3 from Aa2) and Illinois (to A2 from A1), the report said. Moody's has a negative outlook on nine states.
"Conditions that would lead us to revise the sector's outlook to stable, such as continued economic and revenue growth or a more muted impact of federal downsizing, remain to be seen," the report said.
Funding public pensions remains a challenge, the rating agency said.
"Although public pension assets grew a net 17.6 percent in 2011 following strong market performance, those gains did not offset all of the losses pension plans experienced during the 2008-09 downturn, and subsequent returns in fiscal 2012 were in the range of only 1 percent," Moody's said, adding that pension budgetary costs will be pushed upwards by the increasing number of state government retirees and by the benefits which have been boosted in the past.
"States that are unable or unwilling to implement pension reforms or seek other long-term means to fully fund their pension requirements will face the most credit pressure."