(REUTERS) - Moody's Investors Service on Tuesday revised its outlook for US states to stable from negative, marking a significant improvement in its assessment of state finances after cutting its outlook for the sector more than five years ago.
The rating agency said that the uncertainty surrounding federal budget cuts has diminished, revenue growth for many states has exceeded expectations, and states are continuing to build their reserves.
Even as it marked better days for state budgets, Moody's warned the sector faces economic and fiscal risks.
Federal deficit reduction, especially cutbacks in government employment and procurement, could create an economic drag, while employment remains below its pre-recession peak, Moody's said.
At the same time pension contributions will continue to squeeze budgets and "the regional divide in economic growth across the United States is delaying full fiscal recovery in some states," it said.