Moody's Issues Negative Outlook For Local Governments

NJToday.net — Friday, February 22, 2013

NEW YORK, N.Y. — President Barack Obama renewed pressure on congressional Republicans to head off budget cuts that are due to begin on March 1, as Moody's Investors Service renewed its outlook negative for U.S. local governments in 2013 because cities and counties must continue to contend with tight revenues, high demand for spending, and an uneven economic recovery.

Obama is trying to get concessions from Congress to stall the cuts by ending tax breaks enjoyed mainly by wealthy Americans before automatic spending reductions across most federal programs are set to take effect in a process called sequestration, but the credit rating for local governments that depend on federal funds is seriously in danger as is most of the nation's economy.

"Our sector outlook speaks to the challenging environment in which most US local governments will likely operate over the next year," says Rachel Cortez, the Moody's vice president and senior analyst who was the main author of the report. "Overall, the economic recovery remains sluggish despite some bright spots, and looming federal spending cuts may exacerbate weak growth rates."

The spending cuts would trim federal expenditures by $1.2 trillion over the next nine years, including an $85 billion reduction for the current fiscal year that ends in September. While they would slow the growth of the nation's deficit, the spending cuts will also harm America's weak economic recovery.

According to New Jersey Citizen Action, the non-partisan Congressional Budget Office projects that the spending cuts would lead to more than 43,000 lost jobs in New Jersey in 2013.

Defense Secretary Leon Panetta told Congress this week that the vast majority of the 800,000 civilians working for the Department of Defense would likely be furloughed at least one day per week for the next 22 weeks, representing a 20 percent pay reduction.

The New Jersey Hospital Association says that institutions in the Garden State stand to lose more than $110 million this year and $1.3 billion total as a result of sequestration, which could imperil hospitals that are already on shaky financial ground.

Travelers can expect delays when flying, as the Federal Aviation Administration will be forced to furlough staff - including air traffic controllers - for one to two days per pay period. The Center for American Progress predicts that more than 100 regional airports, including Atlantic City International Airport, could be forced to close at least temporarily.

Local government credit rating downgrades have been happening since the economic recession. Moody's Investors Service had downgraded Union County's long-term general obligation bond rating to Aa1 from Aaa on May 9, 2012 based on its reduced financial flexibility. Moody's downgraded the City of Perth Amboy's long-term rating to Baa3 from Baa2 on Dec 4, 2009.

The outlook expresses Moody's expectations for the fundamental credit conditions in the sector over the next 12 to 18 months. It does not speak to expectations for individual rating changes and is not a prediction of the expected balance of rating changes during this time frame.

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