By Stephanie Kelly

NEW YORK (Reuters) - Fitch Ratings upgraded more U.S. public sector debt than it downgraded during the second quarter with a significant increase in upgrades in part because of a change in criteria for how it reviews tax-supported credits, the firm said in a report on Thursday.

There were 83 upgrades versus 43 downgrades in the quarter, Fitch said. Over the past two years, quarterly credit rating upgrades have exceeded downgrades in the public sector.

The tax-supported sector — which includes cities, counties and school districts — were about 75 percent of upgrades and 60 percent of downgrades, said Barbara Rosenberg, senior director at Fitch.

Negative Rating Outlooks decreased to 118 from 136 during the same time.

"We're seeing stronger economic recovery, and we're seeing it across all localities," Rosenberg said.

"Some of the localities have been a little more sluggish in the recovery. We're seeing now a stronger recovery throughout. These fundamental changes in the sector are helping drive upgrades and downgrades," she said.

A Fitch report said that published assessments on revenue, expenditure, long-term liability burdens and operating performance are some of the factors behind the new criteria, which Fitch changed in April.

Fitch said that the downgrading of Puerto Rico's credits contributed significantly to the par value of debt that incurred downgrades. The U.S. commonwealth, with a $70 billion debt burden, has defaulted on a number of its bonds and is in the process of having a federal oversight board installed to oversee its financial restructuring.

Puerto Rico comprised about 60 percent of all downgraded par, and Connecticut about 25 percent, Thursday's report said. It said the next largest issuer downgrades included Louisiana and Alaska and its related debt - roughly 6 percent and 3 percent of all downgraded par, respectively.

Par value on bonds downgraded was $68.3 billion versus $24.5 billion of par value that experienced upgrades.

Positive and Negative Rating Outlooks are converging, as Positive Rating Outlooks increased in the second quarter 2016 to 114, compared to 10 during the same time last year, the report said.

(Reporting by Stephanie Kelly; editing by Daniel Bases and Grant McCool)