Municipal bond ratings took a big hit in the third quarter, with the two major credit rating agencies reporting that the dollar volume of downgrades far exceeded upgrades.

But if the July downgrading of California debt is excluded, the overall rating revisions in the quarter were actually positive, reflecting the strength of the economy.

Moody's Investors Service said yesterday that it upgraded 43 municipal issues affecting $2.3 billion of debt, and downgraded 38 issues covering $24.5 billion.

The state of California accounted for $22.6 billion of the debt downgraded by Moody's in the quarter.

In September, Moody's also downgraded the general obligation bond rating of Los Angeles County, affecting $556 million of debt. Moody's said the downgrade was announced in conjunction with the county's offer of nearly $2 billion of taxable pension obligation bonds. The deal was priced yesterday.

Excluding California, the overall credit picture in the third quarter "captures the feeling that credit trends have been stable to improving," said George Leung, managing director of state ratings at Moody's.

"In reviewing fiscal conditions, as evidenced by surplus balances that have been built up, as well as tax collection wends, states by and large are in recovery," he said.

But Leung also pointed out that states still face significant cost pressures in the areas of education, health care, and corrections this year.

"The underlying revenue growth from the economy to support those spending pressures do merit a cautionary tone on our part," he said.

Standard & Poor's Corp., meanwhile, said it downgraded $21.4 billion of municipal debt in the third quarter, or more than five times the $3.9 billion of debt that was upgraded. The downgrade of California's $18.4 billion of GO bonds drastically skewed the rating agency's results.

Moody's figure of $22.6 billion of California state debt that was downgraded in the quarter includes $4.1 billion of lease revenue bonds.

Moody's upgraded 166 credits and downgraded 127 during the first three quarters of the year, while the dollar volume of downgrades exceeded upgrades by more than two to one.

Moody's said $14.2 billion of debt was upgraded, and $35.6 billion was downgraded.

Apart from California, notable revisions of GO bond ratings in the third quarter affected the debt of New Mexico, and the cities of PIano, Tex., and Syracuse, N.Y. New Mexico and Plano were upgraded, and Syracuse was downgraded.

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