2021. In the first phase, deficit reduction of $917 billion would be achieved prima- rily through caps on discretionary federal spending. In a second phase, which would overlap the first phase, the BCA also establishes the goal of $1.5 trillion in additional deficit reduction over the 10- year horizon (2012 to 2021). In phase two, specific cuts are to be agreed upon by a 12-member joint special committee of members of Congress and then voted on by Congress and sent to the President. If by Jan. 15, 2012, the joint special com- mittee process does not result in enacted

legislation projected to achieve at least $1.2 trillion in deficit reduction by 2021, automatic cuts of this amount would be triggered. The automatic cuts of $1.2 tril- lion would be across-the-board (except certain specifically exempted programs) and split between security and non-secu- rity related spending. Importantly for state governments, Medicaid and the chil- dren’s health insurance program (CHIP) are among the programs that would be exempted should the across-the-board cuts be triggered. From the standpoint of state and local governments’ fiscal posi-

tions, the structure of the automatic trigger cuts have potential to be more favorable than cuts that could derive from the joint special committee recommenda- tions. It is possible the joint special com- mittee could recommend approaches to deficit reduction that more directly—and negatively—affect state and local govern- ment budgets than would the trigger cuts.

Analytic Implications Of The Budget Control Act To States Cash flow Following the recent increase to the fed- eral debt limit, we expect federal cash dis- bursements to flow to payees as sched- uled, including those to state and local governments. Thus, we do not anticipate cash flow disruptions for states with regard to their receipt of federal aid. As we understand it, though, states had been actively developing contingency plans in the event an agreement had not been reached and the federal government began prioritizing its disbursements. It was unclear where important state aid, such as that for Medicaid, would have ranked among federal priorities. According to our initial survey, most states had cash flow capacity to continue to fund operations as budgeted for periods ranging from several weeks to months. In our ongoing review of states’ creditworthiness, we will con- sider cash management in advance of any federal spending reductions that we believe could strain states’ liquidity.

Tax reform and market liquidity We do not anticipate material disruption to the market for most municipal bonds as a result of the BCA. However, should the federal tax code be reformed it is possible that the municipal bond market could be affected. Current law includes expiration of the Bush-era reduced marginal tax rates. If the tax cuts (passed in 2001 and 2003) were allowed to expire, marginal federal income tax rates would increase on Jan. 1, 2013. Under such a scenario, the tax exemption on interest income from investments in tax-exempt municipal bonds could increase in value to investors subject to federal income taxes. This could exert downward pressure on interest rates faced by municipal issuers.

Standard & Poor’s CreditWeek | August 17, 2011 70

Fiscal year 2009; includes stimulus funds

Federal Nominal spending state GDP % state

State Rating* Outlook (mil. $) (mil. $) GDP

Nevada AA Stable 18,894 125,037 15.1

New Hampshire AA Stable 11,844 59,086 20.0

New Jersey AA- Stable 80,647 471,946 17.1

New Mexico AA+ Stable 27,472 76,871 35.7

New York AA Stable 194,975 1,094,104 17.8

North Carolina AAA Stable 84,830 407,032 20.8

North Dakota AA+ Positive 8,618 31,626 27.2

Ohio AA+ Stable 107,975 462,015 23.4

Oklahoma AA+ Stable 37,516 142,388 26.3

Oregon AA+ Stable 33,594 167,481 20.1

Pennsylvania AA Stable 135,687 546,538 24.8

Rhode Island AA Stable 11,517 47,470 24.3

South Carolina AA+ Stable 46,904 158,786 29.5

South Dakota AA+ Stable 9,499 38,255 24.8

Tennessee AA+ Positive 68,546 243,849 28.1

Texas AA+ Stable 227,108 1,146,647 19.8

Utah AAA Stable 20,702 111,301 18.6

Vermont AA+ Stable 7,092 24,625 28.8

Virginia AAA Stable 115,554 409,732 28.2

Washington AA+ Stable 66,560 331,639 20.1

West Virginia AA Stable 19,808 61,043 32.4

Wisconsin AA Stable 61,280 239,613 25.6

Wyoming AAA Stable 6,278 36,760 17.1

Average 24.6

Min 13.4

Max 37.6

*Ratings as of Aug. 17, 2011. Sources: U.S. Census Bureau, Consolidated Federal Funds Report for Fiscal Year 2009 (table 13); 2009 State GDP - Bureau of Economic Analysis.

Total Federal Spending As % Of State GDP (continued)