December 3, 2012 / 5:16 PM / 5 years ago

UPDATE 1-Fitch expects above-average local government downgrades in 2013

Dec 3 (Reuters) - A clutch of fiscal problems, including rocky revenues and under funded pensions, will likely bring a large number of credit rating downgrades for U.S. local governments next year, Fitch Ratings said on Monday.

“An uneven revenue recovery, reduced spending flexibility, labor and pension pressures, and questionable willingness to pay, will likely result in a continued above-average rate of local government downgrades in 2013,” the agency said in an outlook for the year.

Most local governments rely on property taxes for revenues and, with the housing market remaining weak, many have been struggling for several years. Fitch expects modest revenue growth next year, but it will likely “provide scant budgetary relief,” Amy Laskey, Fitch’s managing director, said in a statement.

“Fitch expects property tax base declines to slowly reverse, with flat to increasing property tax revenue expected in 2013,” the report said. “Moderate single-digit annual sales tax growth is also expected. Other economically-sensitive tax revenue will likely remain more volatile ...but Fitch expects some level of growth in most areas in 2013.”

Fitch said it expects downgrades in the “one-to-two-notch range,” but severe downgrades are possible.

The number of downgrades will depend on a variety of risks, including whether housing values hit bottom in 2012, if the federal government is able to forestall the combination of tax hikes and spending cuts dubbed the “fiscal cliff,” and if the federal government uses spending cuts on state and local programs to reduce the deficit, Fitch said.

The agency also raised a red flag for buyers in the $3.7 trillion municipal bond market.

“In a limited - but increasing - number of municipal bankruptcies of management’s lack of willingness to make debt service payments a priority, much less treat them as a mandatory cost, is a great concern,” Fitch said.

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