NEW YORK Feb 28 Standard & Poor's said on
Thursday the $85 billion in automatic spending cuts from the
federal budget that could become reality from Friday may have
only a minor negative impact for local governments.
That is because most municipalities since the beginning of
the recession have shown willingness to impose cutbacks in
response to weaker revenue.
"States and many local governments have been actively
monitoring developments at the federal level, and we believe
they have evaluated the potential effects of sequestration in
their revenue forecasts and budgets," said S&P credit analyst
In a separate report on municipal infrastructure issuers,
the agency said the primary impact will stem from a reduction of
at least 5.3 percent of the federal interest expense subsidy to
issuers of Build America Bonds and Recovery Zone Economic
Development Bonds, a popular state and local financing program
from the 2009 economic stimulus plan.
Legal provisions allowing the issuers to call those bonds at
par during an "extraordinary event" may push some public
infrastructure issuers to replace the debt by issuing new
S&P analyst Ted Chapman said "...it is possible that
sequestration may also qualify as an extraordinary event. This
would, therefore, provide the opportunity for the issuer to sell
traditional tax-exempt bonds to refund the taxable BABs and
Super-BABs, potentially at a substantial savings."
Federal cuts may contribute to compressed earnings and cash
flow at not-for-profit health care providers due to cuts in
Medicare, which is not exempt from sequestration, S&P said in a
"The sequestration reductions will, in our opinion,
contribute to compressed earnings and cash flow immediately,
which could impact credit ratings over time," said analyst