(Bloomberg News) State-government bonds, which have underperformed local debt by the most in 14 months, may be poised to pull ahead as flagging property-tax revenue threatens budgets in U.S. cities and counties.

That may benefit Virginia's sale of $167 million of bonds this week. It's the state's first general-obligation issue since Moody's Investors Service placed its top credit rating on review on July 19 because of dependence on federal spending.

U.S. states' revenue jumped 10 percent in the second quarter from a year earlier, driven by personal-income and sales taxes, the Census Bureau said last month. It was the most since 2006 and the sixth straight gain. Property-tax collections, the main income source for localities, dropped 1 percent.

"Total-return performance potential for larger, liquid state names offer better prospects, given the recent data," James Ahn, who manages $1 billion of short- and intermediate- term municipals at JPMorgan Chase & Co. in New York, said in a telephone interview.

States can also pass on reductions in federal aid and shift responsibility for services to local governments to close budget deficits, said Howard Cure, director of municipal-credit research for Evercore Wealth Management LLC in New York, which manages $2.9 billion of municipal debt.

California, which cut spending on schools and the poor this year to erase a $26 billion projected budget deficit, plans to move thousands of criminals from state control to county lockups under a plan by Governor Jerry Brown.

Local Burden

"States have to balance their budgets," Cure said in a telephone interview. "They're going to do it to a large extent on the backs of local governments."

Bonds sold by cities, counties and municipalities returned 6.86 percent from April 11 through Oct. 10, while state-level debt produced 5.88 percent, according to a Bank of America Merrill Lynch index that tracks prices and interest income. That's the biggest six-month outperformance for localities against states since the similar period ended Feb. 10, 2010.

Virginia is one of 15 states with Moody's top credit rating. A general-obligation bond sold by the state in October 2009 and maturing in June 2028 traded Oct. 4 at an average yield of 3.12 percent.

That's 45 basis points less than an index of AAA general-obligation debt maturing in 17 years and unchanged from the last trade before Moody's July announcement of a possible downgrade. A basis point is 0.01 percentage point.

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