MOODY’S: Federal Budget Cuts Could Paralyze State And Local Governments

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Moody’s affirmed its negative credit outlook for state and municipal credits Monday, citing revenue losses as Washington looks to reduce the federal deficit.”The determination of both political parties to reduce project federal budget deficits is certain to result in reduced funding for federal programs run by the states,” Moody’s said in a report, obtained by Reuters. “Given the numerous challenges facing the local government sector, we believe that rating downgrades will continue to outpace upgrades until we begin to see meaningful economic growth and recovery of property values.”

Although tax revenues have increased slightly, they have not risen enough to replace the loss of federal stimulus funding, the statement said. The ratings agency added that state and local governments also face pressure from ballooning Medicaid costs and public pension liabilities.

The problem is worse for local governments that are suffering from the loss of state aid, while still struggling to recover from the housing slump. Municipalities largely rely on revenue from property taxes, which have declined for two consecutive quarters. 

This raises concerns that states may have to bail out troubled local governments, Moody’s said, although bond defaults and municipal bankruptcies will likely remain rare.