There's good news and bad news from two of the major credit rating agencies--only it's about the same situation. While both agencies note improvements in state revenue collections, they assess the effect of the recovery on state creditworthiness differently.

Moody's Investors Service reports that, of the state and local governments they rate, upgrades as measured by dollar amounts significantly outweighed downgrades in the first quarter of 2004--a sharp reversal of recent trends. According to a report on first- quarter activity, the agency considered the stabilization of state credit quality a reflection of improving revenues and economic conditions and expects more upgrades than downgrades ahead. That said, Moody's went on to note that "many states and municipalities remain vulnerable until financial reserves notably improve."

Standard & Poor's had a different take. Of the states and localities they rate, the par amount of downgrades was greater than the par amount of upgrades--$20 billion versus $14 billion. In addition, the pace of upgrades slowed, with upgrades lagging downgrades in the tax- backed sector 69 to 88, respectively. "Credit concerns still loom in many sectors," their report on the first quarter noted, "with many entities facing ongoing challenges, such as rising health care and pension costs, at a time when reserve levels are lower, and revenue growth may be difficult to attain."

The mixed picture reflects an April survey from the National Conference of State Legislatures that found 32 states were able to finish their 2004 fiscal year with surpluses but that most of those surpluses were small and tax revenues were not growing fast enough to offset rapidly rising costs.