WASHINGTON Dec 20 The "fiscal cliff" of
impending federal spending cuts and tax increases set for the
beginning of the year poses a wide variety of risks to the
public sector, but many of the threats hanging over state and
local governments are not severe or direct, Moody's Investors
Service said on Thursday.
President Barack Obama and Congressional leaders are in the
middle of tough negotiations to avert the cliff before the start
of the new year. Economists have warned the combination of tax
hikes and across-the-board spending cuts, often referred to as
sequestration, could plunge the country back into recession.
A downturn or a downgrade in the U.S. debt rating resulting
from the federal budget battles would threaten the credit
quality of the public sector, Moody's said.
"Rating changes could ensue for public finance credits that
have direct, or in some cases indirect, linkages to the rating
and credit standing of the U.S. government," it said.
"These rating changes would occur if Moody's lowers the U.S.
government's rating as a result of the fiscal cliff, or a
federal budget agreement is reached that fails to reduce the
ratio of federal debt-to-GDP over the medium term," it added.
Sequestration would mostly impact states indirectly as
federal grants to people shrink and they spend less money.
Currently, Medicaid, the healthcare program for the poor that
states administer with federal reimbursements, is safe from
sequestration. Moody's warned that if Obama and Congress were to
decide to cut it in their agreement, "the credit impact would be
"The largest component of the sequester is an approximately
9.4 percent, $30 billion across-the-board cut to discretionary
defense programs," Moody's added. "If it is implemented, the
economic impact will be most heavily felt in states with high
concentrations of defense procurement contracting such as
Maryland, New Mexico and Virginia."
Local governments only receive 5 percent of their revenues
from direct federal payments, on average, meaning they too will
only be affected by sequestration as lower spending hurts their
revenues, Moody's said. Cities dominated by the federal
government and military could be hit harder.
While Medicaid is off limits in sequestration, Medicare, the
health insurance program for the elderly, would have to reduce
reimbursements for services by 2 percent. That would hit
Sequestration would also cut agencies that fund research at
universities, but will likely only impact new grants, while the
availability of federal financial aid may shrink, hurting higher
education, Moody's said
The agency also said defense spending cuts will hurt
military housing and could negatively impact revenue bonds for