WASHINGTON Feb 21 Moody's Investors Service is
keeping its outlook negative for U.S. local governments in 2013,
as cities and counties must continue to contend with tight
revenues, high demand for spending, and an "uneven economic
recovery," the rating agency said on Thursday.
Those local governments with "elevated reliance on federal
employment or funding that is subject to federal budget cuts"
have an increased risk of rating downgrades as the U.S. Congress
wrestles over the federal debt and deficit.
Automatic spending reductions across most federal programs
are set to take effect in a little more than a week, in a
process called sequestration, and the military is warning it
will have to furlough thousands of civilian employees.
Moody's said local governments in Maryland and Virginia,
along with the nation's capital city of Washington, D.C., are
particularly at risk. But it noted that those places "with
significant labor force concentration in the healthcare sector,"
could also face threats to their credit quality from reductions
in federal Medicare spending.
"Stagnant or reduced state aid is a significant drag on
local government credit quality," Moody's added. "State tax
receipts are slowly rebounding, but other state spending
priorities, such as Medicaid, are competing with resources
available for local governments."
Property taxes provide the bulk of local governments'
revenues, and cities and counties are still feeling aftershocks
of the housing market downturn more than five years ago.
"Despite signs that home prices are increasing, municipal
property tax revenues remain under pressure. Many local
governments will not immediately realize material revenue growth
because property tax receipts typically lag tax base assessments
by several years," the agency said.
The 2007-09 recession forced many local governments to
stretch their resources to cover rising demand for services, and
most cities are struggling to manage. In the latest case showing
the impact of these financial constraints, Michigan is
considering taking over the shaky finances of the city of
At the same time, the financial crisis ravaged the
investments of many public pension funds. Moody's noted that
those losses "have yet to be fully recouped." It noted that
swelling pension liabilities are putting pressure on many
Illinois local governments, especially as the state attempts to
address its pension, the worst-funded in the nation.
Cities unable to make up for pension shortfalls have been
pushed close to or into bankruptcy.
"Local government bankruptcy filings, defaults, and other
severe credit events are increasing but are still rare,
especially among rated entities," Moody's said.