Moody’s assigns negative outlook to all U.S. municipalities

Moody’s Investors Service has placed all U.S. municipalities on negative outlook, indicating its expectations for the whole sector over the next 12 to 18 months. It is the first time that the New York-based ratings agency issued a broad report on municipalities. The dismal forecast, which was released yesterday, reflects the challenges that local governments face due to the collapse of the housing market, financial-market disruptions and a deep recession. The Moody’s report is titled “Moody’s Assigns Negative Outlook to U.S. Local Government Sector.” Municipalities will face reduced tax revenue as plummeting home values lead to lower property tax collections and as consumers cut back on spending, thus reducing sales tax revenue, the report stated. Similarly, rising unemployment levels will lower income tax revenue during a time when more individuals need social services. States suffering most deeply from slowing real estate development include California and Florida, while Connecticut, New Jersey and New York continue to be affected by the turmoil in the financial services industry. Problems in the auto industry could also affect governments in Indiana, Michigan and Ohio. Moody’s also pointed out that in general, tourism, gaming and manufacturing could be disproportionately hit by the downturn and that municipalities with exposure to these industries could experience significant downward ratings pressure in the near term. Local governments with variable-rate debt exposure or that need to get into the capital markets for annual cash flow borrowing will also face liquidity problems. Jefferson County in Alabama was singled out in the report as the issuer with insurmountable problems due to variable-rate risk exposure, but Moody’s said that most municipalities’ exposure to this risk has been relatively modest and manageable. Although the outlook isn’t great for the overall municipal sector, Moody’s said, the report is separate from the outlook it provides on individual municipal bonds.