Wall Street Journal: Upgrading the States
Florida and Ohio get rewarded for their fiscal reforms
August 16, 2011

Ohio and Florida get plenty of attention as Presidential election swing states, but this year they deserve notice for another reason. While Uncle Sam was having its debt downgraded, Ohio and Florida both got upgrades from Standard & Poor's in July as a result of their improved fiscal management.

In its report on Ohio, the rating agency attributed its upgrade to AA+ stable from AA+ negative to the Buckeye State's budget reforms. Governor John Kasich pushed through a budget that closed a roughly $8 billion deficit without raising taxes. S&P also noted the moderate economic recovery and an unemployment rate that fell to 8.6% in May 2011 from 11% in March 2010 as signs of a better long-term fiscal outlook.

Ditto for Florida, which won a AAA rating after closing a budget hole with what S&P said were "significant cost-cutting measures" and making a commitment to maintaining strong reserves. Governor Rick Scott's 2012 budget was praised for "significant measures" to address its budget deficit and for being "proactive in reducing expenditures to adjust for revenue shortfalls."

Such ratings matter to states because they reduce the cost of borrowing and often improve the perception of their business climates. Michigan (like many states) was downgraded during the recession, but new Governor Rick Snyder has been stumping for an upgrade, touting his state's economic comeback, $1.2 billion in spending cuts, welfare reform and modest tax reform.

These shifts in state fortune are all the more remarkable because they come despite the end of the federal stimulus cash that began in 2009. States that rely heavily on such federal payments are more vulnerable to a downgrade now that the U.S. government has suffered its own credibility damage. The raters assume that no more federal cash will be forthcoming.

But S&P pointed out recently that ratings for state and local governments can be higher if they show they "maintain stronger credit characteristics in a stress scenario" and can offset the loss of federal cash thanks to "financial flexibility and independent treasury management." That's credit-rater-speak for saying that a state will be rewarded if it gets its act together.

These newly elected Governors have their share of political bruises for pushing reforms, and both Messrs. Kasich and Scott have suffered in the polls. But the credit upgrades are a sign of better things to come. By making hard decisions early, they have made job-damaging tax increases less likely and put their states in a better position to benefit from the national economic recovery—assuming it continues.