UPDATE 1-S&P sees US shutdown hurting D.C. budget; cuts score

Wed Oct 9, 2013 1:23pm EDT

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WASHINGTON Oct 9 (Reuters) - The current federal budget shutdown is constraining the budget and spending plans of Washington, D.C., Standard & Poor's Ratings Service said on Wednesday as it cut its score on the U.S. capital's institutional framework.

S&P's cut in the score to "strong" from "very strong" is unlikely to have a large impact on the district's debt rating but is a sign that a prolonged shutdown could have negative credit implications.

A city without a state, the District of Columbia must receive federal approval for its budget, which normally happens when the U.S. Congress passes the national budget. Last week, though, Congress deadlocked and shut down federal operations, leaving D.C. spending plans in limbo.

"Given the current federal budget impasse and lack of approval to begin its current-year appropriations under a federal continuing resolution, we believe the district's revenues and expenditures are subject to inherent unpredictability that constrains its ability to control and administer its spending responsibilities," said Standard & Poor's credit analyst Le T. Quach, in a statement as the agency cut the score for the city to "strong" from "very strong."

The rating agency added that the city's funding relationship with the federal government does not provide the district "with ample time to plan and adjust."

The current gridlock among legislators, coupled with uncertainty about how long the shutdown will last, places the district in "a state of dependence on the federal budget process," it said.

Within days of the shutdown starting last week, D.C. announced it could no longer pay the hospitals, doctors and organizations in its Medicaid healthcare program for the poor. Earlier this week, it added that it would not issue tax refunds until the shutdown ends.

With its budget locked up, the city is relying on emergency reserves to fund operations. In a letter to President Barack Obama and congressional leaders on Wednesday, Washington Mayor Vincent Gray said the district's contingency funds would soon be exhausted.

On Wednesday, he joined the district's member of the House of Representatives, Eleanor Holmes Norton, and House Oversight Committee Chairman Darrell Issa at an event highlighting the consequences of the federal shutdown, saying the city is suffering "dire effects."

Last week, another of the top three credit raters, Fitch Ratings, said the shutdown has no negative credit implications for the district.

Still, it said, "federal employment provides an important share of district tax revenues and the lack of a federal budget limits the district's ability to provide basic services."

Looking more broadly at the Washington metropolitan area, Moody's Investors Service said the shutdown could hurt the income tax revenue of Maryland counties and the sales taxes of cities in Virginia. It added, though, that most "D.C. metro area local governments have strong credit fundamentals that will help them withstand a prolonged government shutdown."

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