Moody’s: Credit Crisis to Spur State and Local Budget Cuts
The current credit crisis and economic downturn will result in significant operating and capital budget cuts by state and local governments, according to a new Moody’s report. The cuts may extend to K-12 education, which so far has largely been off limits.
The report provides broad perspective on the credit impacts of the ongoing economic downturn and recent credit unrest for state and local governments, as well as enterprise issuers such as airports, hospitals and toll roads.
Significant new challenges may be felt by many municipal debt issuers due to current turmoil in short-term credit markets. This will be the case especially for issuers who rely on market access for short-term financing, have relatively more exposure to volatile variable-rate debt, or have significant counterparty exposure, Moody’s says.
These issuers will experience downward rating pressure to the extent the stress posed by short-term liquidity issues, changing debt amortization terms, or counterparty defaults or downgrades is more pronounced than for other issuers.
Property taxes and other local government revenues will continue to be pressured by the flat housing market and weak economy, says the Moody’s report. In many areas around the country, property values may continue to decline, and, especially where the housing markets had boomed the most, real estate-related revenues such as transaction taxes or new water and sewer connection fees also may fall.
Most governments are likely to adjust by making operating and capital spending cuts, in some cases dramatically so, in addition to drawing down reserves. At the state level, this may include reductions in aid to local governments that in some instances may extend to aid for K-12 education, which has been held harmless from budget cuts thus far.
Enterprise issuers are affected as well, although in different ways, says Moody’s. Airports, hospitals and toll roads are most likely to experience some budget shortfalls due to drops in demand for their services. Most universities and power utilities will be somewhat more insulated from near term budgetary effects.
State and local housing finance agencies could experience downward pressure on earnings in the medium- to long-term. This will be the case if barriers to market access persist and decrease the growth of lending programs, or if economic conditions lead to higher single family mortgage losses or lower housing project rents.
“The economic downturn will stress many issuers of municipal bonds, and require a broad array of difficult choices, but many governments and other enterprises are expected to have the flexibility to adjust and maintain their strong credit ratings,” said Moody’s Vice President Nicholas Samuels, author of the report. “Some issuers may be disproportionately impacted by the economic downturn and may experience negative pressure on their long- term ratings.”
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