Sixteen states are on Moody's Investors Service negative outlook and four on negative watch, with "future credit deterioration likely," according to Robert Kurtter, senior vice president of state ratings for the credit-rating agency. Moody's had already downgraded eight states in the past two years.

It's a similar story at Standard & Poor's Corp.: five state downgrades since 2001 and 11 states on negative outlook--a listing that can presage the lowering of a rating.

Not since the recession of the early 1990s, when Standard & Poor's alone downgraded 11 states, has there been so much negative volatility in state credit ratings. While several states--most notably Louisiana- -improved their ratings in the past few months, the swing away from a domination of upgrades over downgrades may be underway as states struggle to close shortfalls in their budgets.

The large number of "negative" outlooks stems not so much from the prolonged national economic downturn as from what Kurtter calls "a recession in government revenue." Of concern to credit analysts is the way each state reacts to that recession, and many have not brought spending into line with revenue expectations or vice versa.

One particularly disturbing sign that suggests states are in denial about what they will be able to afford is the sharp increase in the past year of deficit financing--issuing long-term bonds not to build new highways or schools but to cover operating costs. "We're surprised at the degree to which states are relying on deficit financing in this credit cycle," Kurtter says. The preferred forms of deficit financing that about one-fifth of the states have turned to in the past year are tobacco bonds and pension bonds, with one or two states not bothering to cloak their issues with other names, such as Connecticut's $220 million bond last year.

Another sign of fiscal strain is the abrupt rise in note issuance, which was 28 percent higher in 2002 than in 2001, with one-third of that borrowing occurring in the last quarter. California, New York and Illinois are among the states that came to the short-term market within the past year to raise cash to pay their immediate bills.

There is not much optimism for a quick turn-around and a return to the heady days of easy-to-balance budgets. No one can say whether an economic rebound is imminent or if the economy will continue on its listless path, but almost all states have factored some recovery into the second half of their fiscal 2004 budgets. That suggests states are hoping they can wait out the slowdown, a tactic analysts consider a risky proposition.

That said, all three credit rating agencies--Fitch, Moody's and S&P-- note that as a class of bond issuers, states still are the creme de la creme. They have diverse economies, large tax bases and discretionary powers that allow them to adjust to changing fiscal conditions. Where the average Moody's rating for a corporation is A3, the state average is a much higher AA2. "These are difficult times," Kurtter says, "but states are nowhere near the situations of the corporate sector. There is no risk of default."